art of day trading - futuresmag

How to find the right
support and
resistance
By Joe Duffy
Finding support and resistance for a
day-trader can keep him alive in a
volatile market. Here's one idea,
implemented with others, to find
those target areas.
S&P day-trading
systems:
What works and
what doesn't
By George Pruitt
If you want to develop a system,
here are some ideas gleaned from
studying top performing day-trading
systems. If you would rather buy a
system, those that only trade the
S&P 500 seem to do best.
Getting the 'edge'
By Frank J. Alfonso
The best advice for an off-floor
trader who wants to day- trade is to
develop or buy a system that will
force him into action. Buying a
system may save you time, but you
should use the same rigorous rules
to test it.
Applying TD

Sequential to
intraday charts
By Tom DeMark
Originally designed for daily
analysis, Tom DeMark's TD
Sequential indicator also works for
intraday analysis. It is especially
effective for targeting high- and
low-risk entry points.
Taking advantage of
the big event
By Mitchell Holland
Day-trading takes more finesse than
most techniques. Here is a way to
take advantage of market reports,
etc. without being taken out before
the market moves.
Get ready: How an
options specialist
prepares for the
market opening
By Jon Najarian
When a professional options trader
prepares for the day's market, he
looks at much more than technical
indicators. Here's a personal account
of what it takes to be prepared for
the day.
Day-trader's paradise
By James T. Holter

There's more than just knowing how to day-trade. You must
know where to day-trade. Good day-tradable markets have
certain attributes. Knowing these, and which markets have them,
at least puts you in the right arena.
All in a day's work
By Mark Etzkorn
Why day-trade? It's a good way to control risk for one thing. But
it's also a unique game. We'll give you some ideas on how to
make the most of the advantages and avoid the pitfalls.
What you need for day-trading
speed
By Darrell Jobman
Before you can put even stellar day-trading ideas to work, you
must have a way to get price data to you and your order to the
floor. Here's what the prospective day-trader needs to set up
shop.
Day-trading: Not what you think
By Mark D. Cook
From a 25-year veteran of day-trading, here are the rules for
succeeding in this most difficult of time periods.
Day-trading overview
By Jake Bernstein
Day-trading's time has come with the advent of intraday quotes
and software availability. Still, some technical analysis
transcends time. Here an old pro provides the strengths and
weaknesses of applying those to day-trading.
Key to day-trading:
Have your 'team' in place
By Chris McGinnis
More important for the day-trader than others is to have the

proper 'team' in place. You especially need a good floor broker
who can execute your trades in a heartbeat. But, you must pay
him well.
Copyright © 2001 Futures Magazine Inc.
The Art of Day-Trading: Table of Contents
[5/14/2001 2:44:42 am]
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Copyright © 2001 Futures Magazine Inc.
The Art of Day-Trading: Table of Contents
[5/14/2001 2:44:44 am]

How to find the right

support and resistance
My personal preference for day-trading and short-term trading is to
buy dips and sell rallies.
Two components are needed to make this strategy work. First, you
have to be trading in the direction that gives you the best chance of
success. Second, you have to be able to identify potential support or
resistance for that trading day. I'll discuss one technique from each
of these two components that make up my day-trading approach.
The first step is to determine which way the market is likely to go today in other words,
is the trend up, down or sideways?
One method to determine the market trend involves a couple of old standby technical
indicators that are available on virtually any charting software: the Moving Average
Convergence Divergence (MACD) and the stochastic indicators. These oldies but goodies
really can be useful if used in the proper combination.
Look at both the MACD and the Slow Stochastic on a
daily chart to determine in which direction you want to
trade the next day. For the MACD, I use a little longer
time value for my inputs then the standard say, around a
10-30-10 exponential moving average combination. I also
use a slow stochastic indicator with an input value of
somewhere around 20 days.
Both of these indicators should be displayed together under the price data. Look for
situations when both the MACD indicator and the stochastic indicator are on the same side
of the signal line.
If both are above their respective signal lines, then trade the buy side. If both are below
their respective signal lines, trade the sell side. Quite often you'll find the MACD and the
stochastic indicators are on opposite sides of their respective signal lines. In these
instances, avoid the market.
The accompanying charts show this simple combination eliminates a lot of noise from the
market and identifies those times when the market has the best chance to make a

trend
move. Throw these indicators up on any chart together,
and you will see this combination works infinitely better
than either indicator alone.
Once you've determined the direction to trade, the next
step is to find support if you want to buy or resistance if
you want to sell. There are several ways to do this, and
my usual strategy is to employ several methodologies to
come up with a confluence or a "keypoint" high-probability trading zone.
Here is one methodology that is being described for the first time. There is no neat name
for this indicator, so I'll just call it the 3x5ATR. To construct it:
1. Add up the true ranges for the last five days and divide by five. This is the 5ATR.
2. Calculate a three-day simple moving average of the highs and a three-day simple
moving average of the lows.
3. To calculate the 3x5ATR for potential resistance, add the 5ATR to the three-day moving
average of the lows. To calculate the 3x5ATR for support, subtract the 5ATR from the
three-day average of the highs.
An important point is that this is not a total day-trading strategy. Look to combine other
techniques that identify potential support and resistance points. A good rule to live by is to
look for a confluence of support or resistance by integrating analysis techniques and
integrating time frames.
Joe Duffy is a former trading contest champion and author of three books and videos on
his trading techniques. A private trader, he contributes research and analysis to the
"Professional Traders Advisory," a daily market letter specializing in stock indexes, bonds
and selected special situations in the futures markets. E-mail:
Back to contents page
Copyright © 2000 Futures Magazine Inc.
How to find the right support and resistance
[5/14/2001 2:44:48 am]
The alignment of the MACD and stochastic indicators together shows you the market trend.

When both indicators are below the signal line, as they were in early December for both the S&P
500 Index and T-bonds, you should be a seller; if both are above the signal line, as they were in
early February, you should be a buyer.
back
March S&P 500 index futures/March T-bond futures
[5/14/2001 2:44:53 am]
By combining the five-day average true range with simple three-day moving averages of the highs
and lows, you can create the 3x5ATR indicator to find support and resistance areas that can be
used in a day-trading strategy of buying on dips and selling on rallies. The S&P charts above and
the above, left T-bond chart show examples of support lines using the 3x5ATR; the above, right
T-bond chart illustrates a resistance line using the 3x5ATR.
back
Support and resistence lines
[5/14/2001 2:45:02 am]

S&P day-trading
systems:What works and
what doesn't
Of all the day-trading systems I've tested over the years, 90% of
them trade the S&P 500. This is the market of choice for most
day-traders because it affords enough potential to make it a
worthwhile venture (see "Volatility heaven," below). By definition,
day-trading means you exit at the end of the day, so your profits
must at least cover your commissions and slippage.
Although a key difference with the S&P systems I've tested is their
approach to entering the market they have ranged from basic breakout systems to
systems based on the phases of the moon the exit signals usually fall into four
categories: protective stop, profit target, trailing stop and, of course, market on close.
Many of the systems use a combination of these exits.
Because the exit technique is as much or more important than the entry in day-trading the

S&P 500, I'll demonstrate that different types of exits work with various types of systems.
Over the past eight years I've often been asked which exit technique is the best. The
answer is it depends on the system; there is no black or white answer. However, through
research, I've found the success of these exit techniques usually depends upon the
frequency of trades a system generates: More frequent trading systems need tighter exits
whereas less frequent trading systems need looser exits.
Volatility heaven
To demonstrate the success or failure of protective stops,
profit targets and trailing stops, I've created two systems
and tested them over the past 11 years.
These systems use basically the same entry technique,
except one trades about five times as much as the other.
Buy and sell signals are calculated by adding/subtracting
a certain percentage of the 10-day-average range to yesterday's close. In addition, today's
range must be less than the 10-day-average range before a buy/sell signal can be placed.
The only difference in the two systems is the percentage used to calculate the buy/sell
signals. System A uses 50% and System B uses 120%. These percentages were determined
by the frequency of trades I was trying to attain.
The systems were tested using five-minute bar data and deducting $100 commission/
slippage per trade. I ran three tests on each system, optimizing different dollar levels for
each exit technique. None of the test results of these two systems includes any trades that
took place during October 1987 and October 1989. Due to extremely high market
volatility, these two time periods can skew performance data.
Protective stop If a system has a high frequency of trades, tight stops usually work best.
My definition of a tight stop is anywhere between $300 and $750. Systems that trade
frequently are trying to make money almost on a daily basis. If the system takes a small
loss, then there is always tomorrow; why take a major loss when you know a trade
probably will be generated tomorrow?
System A (see "Protective stop comparison," right) shows
the performance of the system using several different

protective stop levels. Notice that too tight of a stop also
degrades performance. A protective stop, at the right
level, can turn a losing system into a winner. A system
that trades less frequently usually will need a larger stop.
Unlike faster approaches, these systems are in the market
for considerably less time and therefore need to make
more money per trade. A larger stop prevents a premature
loss due to market volatility. System B shows the
performance of the slower system using different
protective stop levels. As you can see, a larger stop is
needed in this case.
Profit targets Pure profit targets generally don't work. A
good portion of the profit that is generated by an S&P
day-trading system comes from those days when the S&P
takes off and keeps going in the same direction. If you
limit these potential high-profit days, then you limit the
overall profit of your system. System A (see "Variation in
profit targets," right) shows terrible performance using
tighter profit targets. Due to its frequency of trades, the
risk reward ratio is out of whack. Are you willing to risk
trading the S&P 500 on a daily basis in hopes of a $250
win? System B also shows degraded performance by
using tight profit targets. This system trades so
infrequently, it almost has to hit a home run on every trade.
Trailing stops A trailing stop is a combination of a protective stop and profit target. This
type of stop gives the market room to breath but at the same time tries to lock in profit. In
this analysis, I trailed the high/low of the day by x-amount after a trade was initiated. The
trailing stop did not help System A (see "Hitting the trailing stops," below, left) as much as
the fixed protective stop. The profit target aspect of the trailing stop was too limiting on
the big profit days. Nonetheless, the trailing stop turned a losing system into a winner.

System B showed a slight increase in performance at the high end of the trailing stop. This
re-emphasizes the need for a large protective stop and large profit target.
All tests were done using static stop amounts. In today's
market, $500 is totally different than it was in 1986. I
have found, in almost all cases, that self-adjusting
parameters create a much more robust system. An
alternative to static dollar stops, would be to use
volatility-based, self-adjusting stops. For example, instead
of $500 fixed stop, use 10% of the past 10-day average
range. This market-defined stop would change with
market conditions.
There is no black or white answer to which type of stop is
the best to use in a day-trading system. The results shown
are consistent with my research; however, it is not a guarantee that all systems will follow
suit. A large portion of S&P day-trading systems use a combination of these exits. I have
seen systems that will use a protective stop early in the day and a trailing stop later in the
afternoon. Whichever stop you pick, it should be based on thorough research. The longer
time frame over which you can test, the more robust your parameter selection will be.
We are fortunate to have so much intraday data at our disposal, yet at the same time the
data is somewhat skewed. We basically have been in a bull market ever since the S&P 500
futures contract has been traded. Close to 100% of the symmetrical S&P day-trading
systems (buy/sell signals are mirror images of each other) have shown much more profit
on the long side. With this fact, the question "Why short the S&P?" always arises. And of
course the answer always is: "Who knows when a major retracement or bear market is
going to occur." The second question is: "Is it okay for a system to have a bullish bias?" In
other words, should a system try to buy more often than it sells? Again, there really is no
correct answer. There won't be good answer until we have a good sample of bear market
data on which to test.
Let's look at some before and after performance numbers
on System A and System B (see "Before and after," right).

System A, without an exit, was a big loser. However, with
a simple $500 protective stop, the system turns into a
winner. System B was a mediocre winner without any
type of stop, but with a $1,250 protective stop and a
$3,000 profit target, the system's overall drawdown
decreased by about 60%. Notice the profit/loss that came
from the long and short positions.
The changes we made look great, but I must warn you
about curve fitting, which is when you historically back
test to derive a parameter. Don't fool yourself into
thinking you've found the holy grail, when in fact you had
your 166 MHz computer run two weeks optimizing six
parameters. You don't want history to have to repeat itself
exactly for your system to make money. Never test the S&P with less than $100
commission/slippage; in fact real-time analysis has shown slippage to be well over $100. A
system tested at $50 commission/slippage looks totally different than one tested at $100.
The lack-luster performance of System A and System B
may lead you to believe that day-trading the S&P 500 is
not your cup of tea. I derived these systems for
demonstration purposes only and didn't strive to make
them profitable. Futures Truth monitors about 20 S&P
day-trading systems, and about nine of them have shown a profit since they were released
to the public (see "Top S&P day-trading systems," above).
The best two systems, R-Breaker and R-Levels by Richard Saidenberg, have shown
real-time performance similar to hypothetical performance (see "Top performers," below,
left). These systems were released to the public in July 1993. The equity curve after this
date looks as good as the equity curve before. These systems have been successful because
of Saidenberg's countertrend approach to entry and his exit mechanisms. He incorporates a
combination of the exit techniques discussed here. His two systems took advantage of the
heightened volatility in 1996. In the 1980s, any simple breakout approach seemed to work

in the S&P. But during the 1990s, other types of entry and exit techniques have excelled.
Because no system wins all the
time, exit techniques provide a
form of insurance when the
system is wrong. As with all
trading, risk should be measured
and taken into consideration
before placing an order. Don't
arbitrarily place some type of exit technique without knowing the mentality of the system.
I've been told that 40% of research should be spent on the system and 60% should be spent
on money management. In day-trading, your exit is your money management.
George Pruitt is director of research of the independent system testing firm, Futures Truth
Inc., in Hendersonville, N.C., which publishes a monthly review of the systems it tests. A
top-10 system performance list can be found in Futures on a bi-monthly basis.
Back to contents page
Copyright © 2000 Futures Magazine Inc.
S&P day-trading systems:What works and what doesn't
[5/14/2001 2:45:09 am]
back
Volatility heaven
[5/14/2001 2:45:13 am]
back
Protective stop comparison
[5/14/2001 2:45:17 am]
back
Variation in profit targets
[5/14/2001 2:45:20 am]
back
Hitting the trailing stops
[5/14/2001 2:45:24 am]

back
Before and after
[5/14/2001 2:45:26 am]
back
Top S&P day-trading systems
[5/14/2001 2:45:27 am]
back
Top Performers
[5/14/2001 2:45:31 am]

Getting the 'edge'
It's no secret most day-trading profits are made by floor traders.
They not only have the advantages of low commissions and ease of
execution, but they have the "edge" or the ability to buy at the bid
price and sell at the ask price. Although day-trading off the floor is
a completely different game, traders also must have some sort of
advantage that will give them a trading edge.
Certainly live, tick-by-tick quoting equipment is necessary, along
with charting and technical analysis software. Most novice
day-traders watch prices, analyze various intraday charts and
indicators, thinking they can assimilate this flow of information and
make profitable trades. They often hope for some sort of "sixth
sense" to give them an advantage. Unfortunately, the market usually demonstrates it has
more of a sixth sense and soon separates the trader from his money.
Something concrete is needed to give a trader the confidence and commitment to "pull the
trigger." There are so many examples in books and magazine articles isolating some guru's
favorite chart formation or technical indicator that shows where to buy or sell. New traders
follow this advice based on "trust" that the author or guru knows from experience what he
is talking about. But doesn't it make sense to ask, "How many times in the past when this
indicator signaled a buy, did the price actually go up?" Or, "If we use a close $200 stop as

suggested, how many times did we get stopped out for a loss, only to have the market turn
around and produce what would have been a profitable trade?" Or, "If we buy a breakout
of the previous day's high, how many ticks in profits can we expect, given various market
conditions?"
Knowing the answers to such questions will give you an "edge" to win at day-trading.
With all the computing power and historical data available today at relatively inexpensive
prices, you have no excuse to day-trade without hard statistical facts.
Results of historical testing on technical indicators, chart formations or price patterns can
be combined with a "signal generator" to form a trading system. Actual buy and sell
signals are generated throughout the day based on trading models developed with historical
testing. If you have a limited degree of computer knowledge, use TradeStation or
SuperCharts RT by Omega Research or MetaStock RT by Equis International to test a
myriad of day-trading strategies and create trading systems. Expert computer users can
develop more advanced strategies using Microsoft Visual Basic or C++.
To develop a day-trading system, you must obtain historical data and one of the "toolbox"
software programs that can test trading ideas.
There are five main rules to follow when developing a day-trading system:
1.Use long test periods Novice traders often test a strategy back over several contracts, or
even several years, and think they have a tradable method. Unfortunately, day-trading
based on this limited testing will end in disaster. Any trading method must be tested for a
minimum of five years and preferably 10 years or longer. Then, the reality of more
down-to-earth performance statistics appear.
2.Robust variables When testing, or incrementing variables for a system, it is important
that wide ranges of values generate favorable results. If just a few variable increments
produce acceptable results, the trading rule is fragile. Future results will be poor.
3.Limited number of rules Any trading method could be 100% accurate and display
impressive profits if an unlimited number of rules were used, however the method will
almost certainly fail in real-time trading with new data. Keep the number of rules or
conditions a system uses to less than five or six for a 10-year period or slightly higher if
the number of trades or occurrences is high.

4.Real-time or out-of-sample testing After historical tests have been completed over
reasonably long time periods, and variable values have been selected, the trading method
should then be tested over new or "real-time" data. This "out-of-sample" test is usually
over current data, using a shorter period of one to two years. The results will give a good
idea of system performance, just as if the trader were using it in the market during this time
period. Out-of-sample tests on periods prior to the historical testing period also are
acceptable but not as useful as tests over more recent data.
5.Walk-forward testing Most testing programs do not have this advanced feature, which
is really an automated way of generating a whole series of out-of-sample tests. This
approach increments or optimizes system variables over a moderate time period, such as
two years. The variable values that produce the best results over this "learning" period are
then used on the next quarter (three months), which is new or "real-time" data. The results
should be profitable. Then, the first quarter of the learning period is eliminated, and the
next quarter in the database is added to the multi-year learning period. Variables again are
incremented and the best ones are selected for use in the next out-of-sample quarter.
Testing continues like this all the way through the database. The net performance of all
out-of-sample tests is summarized. Overall, the results should be profitable to consider the
system valid for trading with real funds. If the system doesn't hold up to this testing
method, it won't make money in the future period!
Purchasing a system After new traders discover developing their own system is not that
easy, they may consider purchasing a trading method from a system developer. But how do
you decide which system to purchase?
First, all the rules given previously for developing your own system should have been used
by the vendor. Ask him how the method was developed. Were long test periods used?
Does the system have robust variables? Are only a limited number of rules or conditions
used? Was walk-forward-testing employed, etc.?
Then, once you receive the program, you must be able to verify the vendor's marketing
material with the software itself. Don't just buy a "signal-generator." The system you
purchase should duplicate the results advertised. You should be able to run historical tests
over data and see for yourself the simulated performance of the system.

Don't just rely on the vendor's brochure or performance numbers. Go back and run long
historical tests over the data. Increment the variables and check for robustness. Change the
system variables, and do some out-of-sample tests. Then, if the method holds up to the five
rules for developing a system, it can be relied upon for real trading.
Capital Next you need to determine the right amount of capital to use. This is where the
results of historical testing are helpful.
The account size should be large enough to cover the largest maximum drawdown (largest
historical account equity decrease) of the system, plus margin amounts. Again, this is
where the importance of using long test periods shows up. If the maximum drawdown for
the last two years was only $1,800, and you don't realize a big drawdown of $5,000
occurred six years ago, you are not aware of the potential risks of trading the method and
will not allocate enough trading capital.
Plan for drawdowns. Assume the maximum drawdown will start on the day you start
trading the program. Also, be aware that future drawdowns can exceed previous historical
maximum drawdowns.
Knowing the maximum drawdown also can be used to improve day-trading performance
one technique is to wait for a good-sized drawdown to occur on paper before starting to
trade the system.
Another technique is to keep an eye on systems and variable sets that are not performing
well and are in a drawdown. Start trading them with a small profit objective. If the trades
are profitable immediately, take the profits and stand aside, and wait for another
drawdown. If the trades go against you, continue trading the system until the profit
objectives are reached. However, you need to have the additional capital available to stay
with the system until it begins to recover from the drawdown.
You also must have a high level of confidence in a
system to start trading when it is in a drawdown.
Systems tend to run in cycles. Most traders will hop
on and start trading a system after it has had a very
profitable period, only to catch the next down
cycle. Then, when it is in a losing period, they start

tinkering with it, trying to second guess the system, instead of just sticking with it. Often
they end up missing the next big profitable cycle. Following the five rules for historical
testing will give you the confidence to start trading a system when it is in a drawdown.
Many traders also try to add additional filters or rules during drawdowns. However, this
breaks one of the primary rules of developing a system. Adding additional conditions or
rules just makes the method less reliable in the future. Accept the drawdown as part of a
necessary risk of trading. Let the system run its course and stick with it. Execute your
plan that's your "edge!"
Frank J. Alfonso is president of MicroStar Research & Trading Inc. in Sarasota, Fla. He
has developed trading systems for 20 years, is a former CPA, floor trader and member of
the Chicago Board of Trade.
Back to contents page
Copyright © 2000 Futures Magazine Inc.
Getting the 'edge'
[5/14/2001 2:45:36 am]
The below test demonstrates several of the important rules required to develop a profitable day-trading
system. The test covers a trading system for T-bond futures from 1983 through February 1997 (long test
period). There are eight variables, A through H (limited number of rules), which is reasonable given the
long test period and the more than 3,500 trades. Variable A is incremented from 100 to 200, with the other
variables held constant. System performance, measured by net profit and loss and maximum drawdown,
demonstrates robust variables, as large changes in Variable A still produce very good results.
Incrementing the other variables also should produce similar results.
back
Developing a day-trading system
[5/14/2001 2:45:40 am]
Applying TD Sequential to
intraday charts
When I entered the investment business more than 25 years ago,
volume on the New York Stock Exchange was approximately 6
million shares a day. Stock quotations appeared on a ticker tape,

and futures quotes were on a large wallboard.
I did my market timing research by poring over weekly printed
charts with a magnifying glass. Analysis was limited to conclusions
regarding daily price activity because intraday price data were not
available until the 1980s. As such, once it became available, I was
pleasantly surprised to see that the TD Sequential worked on intraday price movements as
well.
My research showed price movement of most markets displayed a natural rhythmic motion
that could be measured by a combination of factors that either compared closing price
levels or closing prices with extreme price highs and lows. Simply put, TD Sequential
consists of three distinct stages: setup, intersection and countdown.
Setup The initial setup phase consists of a series of at least nine consecutive closes less
than the close four trading bars earlier for a buy setup and at least nine consecutive closes
greater than the close four trading bars earlier for a sell setup. Setup establishes the
environment or the context for the market and determines whether a trader should be
looking to buy or sell the market.
I have added a caveat to the phrase "The trend is your friend." It is " unless the trend is
about to end." At that point it is not prudent to trade with the trend. Most of my market
timing indicators, as is the TD Sequential, are designed to anticipate trend reversals.
Intersection Once the setup series has been defined, I review price activity beginning on
day 8 of setup to determine whether the setup process has been perfected and countdown
can begin. To accomplish this, I require a phase I refer to as intersection.
Intersection requires the high of bar 8 of a buy setup be greater than or equal to the low of
bars 5, 4, 3, 2 or 1 of the buy setup. If this requirement is not met, then the high of bar 9 of
the buy setup must be greater than or equal to the low of buy setup bar 6 or any other price
bar back to bar 1 of the buy setup. If this is not fulfilled, then each successive price bar is
compared until its high is greater than or equal to the low of the price bar three or more
price bars earlier back to bar 1 of the buy setup.
For intersection to occur in a sell setup, the low of setup price bar 8, 9 or the first
subsequent bar must be less than or equal to the high three or more price bars earlier all the

way back to bar 1 of the sell setup.
Intersection is a required step because it assures that the rate of decline or advance is
decelerating sufficiently to enter the final phase, which is countdown.
Countdown TD Sequential buy countdown consists of a series of 13 successive closes less
than or equal to the low two price bars earlier. Once that has been accomplished, the
market generally is in a low-risk buy entry zone. The TD Sequential sell countdown
consists of a series of 13 successive closes greater than or equal to the high two price bars
earlier. This generally indicates a low-risk sell entry zone.
Whereas setup requires the price comparisons be maintained consecutively, countdown
does not apply such restrictions. To prevent high-level, low-risk buy countdown 13 entries
and low-level, low-risk sell countdown 13 entries, I've installed the requirement that day
13 of a buy countdown be postponed until it occurs below day 8 of the buy countdown
and, conversely, that day 13 of a sell countdown be postponed until it occurs above day 8
of the sell countdown. "Recycling" is a concern that could arise in a strongly trending
market. Generally speaking, if a subsequent setup occurs prior to completion of
countdown, then a new countdown process must begin.
TD Sequential in action The TD Sequential is versatile over various time frames. The
charts of the March 1997 S&P 500 Index futures contract on Jan. 23 ("Market fall," left)
show the contract declined from approximately 800 to 773, roughly a 27-point collapse, in
1 1/2 hours.
To demonstrate the sensitivity of the TD Sequential to identify
the exact
high and
low on the
chart to the minute, I've applied it to
this time period. The respective sell
countdown 13 and buy countdown 13
are not levels of entry; rather, they
accurately define levels of low-risk
entry. "Market fall" provides you with

a perspective of how the price top and
bottom were formed.
"Closer look #1 (above) and #2"
(right) magnifies the sell setup period
and the buy setup period to illustrate
the simplicity in calculating the respective price setups and countdowns. Note that, in the
case of the market advance, I insert both setup and countdown numbers above the price bar
and, conversely, in the case of a market decline, the numbers appear beneath the respective
price bars.
Furthermore, it is apparent in "Market fall" that,
coincident with the completion of the ninth bar of
the sell setup (a series of nine or more consecutive
closes greater than the close four price bars earlier),
price has a tendency to retrace. A similar
occurrence is observed at 1:45 p.m. when the ninth
price bar of sell setup is recorded.
Buy setups demonstrate a similar behavior only in reverse. At approximately 1:15 p.m. the
ninth price bar of buy setup (a series of nine or more consecutive closes less than the close
four trading bars earlier) was recorded, and prices subsequently rallied. A similar event
took place at 2:10 p.m.
However, not every setup elicits such a response, as you can readily see at 2:35 p.m. when
the ninth bar of a buy setup failed to generate any price movement to the upside.
To demonstrate the application of TD Sequential to other
markets and time periods, I've included a five-minute chart of
May 1997 coffee futures in "Coffee TD Sequential" (right),
which identifies a TD Sequential high-risk buy countdown
completion just prior to the Feb. 20 early morning price peak
before a 10-point plus decline.
Also, in "Longer count" (right), the March S&P 500 Index
futures chart on a 10-minute basis, I identify the TD Sequential

nine-13 high-risk buy indication on Feb. 19, coincident with the
price peak.
Although TD Sequential has worked effectively on a daily basis
for more than two decades, only within the last five years has it
become apparent that this technique can be applied to intraday
price charts as well. Because it originally was designed to be
applied to longer time periods, its ability to identify high- and
low-risk entry zones on an intraday basis is a testimony to its
adaptability and dynamic design.
Tom DeMark is president of Market Studies Inc., a provider of indicator software for most
major quote vendors, a consultant to large fund managers and author of The New Science
of Technical Analysis and Market Timing Techniques: Innovative Studies in Market
Rhythm and Price Exhaustion, published by John Wiley & Sons. TD Sequential is a
registered trademark.
Back to contents page
Copyright © 2000 Futures Magazine Inc.
Applying TD Sequential to intraday charts
[5/14/2001 2:45:44 am]
The sell setup and countdown, peaking at 13.
back
Closer look #1
[5/14/2001 2:45:50 am]
The buy setup and countdown, bottoming at 13.
back
Closer look #2
[5/14/2001 2:46:06 am]
A 27-point plunge in less than two hours on a one-minute bar chart.
back
Market fall
[5/14/2001 2:46:09 am]

back
Coffee TD Sequential/Longer count
[5/14/2001 2:46:13 am]

Taking advantage of
the big event
The bottom line for any trading technique or system is its practical
application in the real world, regardless of the lovely theories that
may have been used in back-testing its strategies.
How reproducible our trading results are often stems not from the
right execution technique but from how close the current conditions
are to a previous time when a similar trading opportunity last arose
and how well we are able to identify these certain conditions in
other words, the right execution needs the right conditions to be
successful.
Like scientists, many trading systems are forced to focus on a narrow set of parameters in
this regard because the broader the parameters are, the harder it becomes to reproduce the
result. Time also is a factor: The more time that goes by following the last set of results,
the less likely it becomes that similar trading conditions still exist.
Some factors that allow you to make a simple execution technique work are:
1) A set of conditions to track.
2) A technique that applies itself to the conditions so you can choose appropriate
entry and exit points.
3) A set of results following the use of the technique to see if it works when tested in
real time.
Here are the terms and defined parameters for a day-trading approach:
Market selection Market selection primarily is based upon one factor: market efficiency.
Because you are looking at a short-term trade, the market must be efficient and respond
optimally to your orders. Several factors make markets efficient, the most obvious, of
course, is liquidity.

Your association with the trading floors also is key. If the trader on the floor will not or is
unable to execute the trades quickly, you lose! Because the bracket trading technique
places orders before the markets open, direct floor access is less important than it would be
in an intraday technique. But your ability to get filled when the market starts moving is key
with this technique.
Perhaps the most important factor to the day-trader is the ability of these markets to
process information quickly. Again, experience being the great teacher it is, you can see
clearly in a short time whether a market is responding in a timely fashion to
changes in important information regarding that market.
Based on these considerations, the Chicago Board of Trade's 30-year Treasury bond
market is a good market because it has great liquidity and is perhaps the most efficient of
all markets. Not only is information processed quickly, but the ability to get immediate
price information and excellent trade execution also makes this a prime candidate for this
day-trading technique.
The event Event-based trading means taking advantage of an important upcoming event
with the hope it will create an impetus to increase market volatility dramatically.
Events are plentiful in the bigger and more-liquid markets. The art of using this
information is assigning some form of a priority to the events that will occur in the near
future. Use the dates of important information releases that are bound to cause market
moves as a primary basis for timing these trades. In the bond market, these are plentiful
and, in many cases, will create the market follow-through you are seeking.
Some important events for interest rate markets, placed roughly in order of significance,
include:
1) Federal Reserve Bank meetings and announcements
2) Economic reports, especially critical when released on Fridays before holiday
weekends (U.S. employment reports, jobless claims, etc.)
3) Options expirations
4) Currency policy meetings or G7 summits
5) Political announcements
6) Intermarket relationships (historic sell-off in stocks, large oil price changes, etc.)

When the markets appear to become indecisive and choppy, many traders look for
confirmation regarding future direction of the market, and the influence of these events
rises dramatically. It is your job to determine the event's significance by paying attention to
the general mood of the markets.
Volatility The basis behind the bracket technique is to take advantage of contractions in
market volatility to create ideal entry points, which act as springboards when the market
regains its volatility and breaks out. These contractions frequently are referred to as a
"volatility squeeze" markets are strongly volatile but experience a day with a small
trading range in anticipation of the following day's report or event.
This trade depends upon volatility contractions to execute entries and expansions to
execute exits. The conditions that make the trade work solely rely upon your ability to note
when it's likely the market will move in your favor but not with the kind of volatility that
makes successful entry points impossible.
Caveats This technique also allows for stop outs, which is when your stop is taken out by
the trading floor just before the market moves in your favor. These are minimized by
proper stop placement and also by the use of a volatility contraction to mark your
entrances.

Negative signals Avoiding the trading days when the best conditions don't exist is an
important skill that improves the bottom line. After many years as a professional trader,
I've had chances to trade futures in many different time periods. Day-trading of any market
likely is the most challenging time period to trade. For that reason I more carefully pick
my battles when day-trading than I would when trading within another time frame.
The technique After giving all this attention to determining that the conditions are "right,"
now we come to the technique a simple T-bond bracket trade. The trade is done by
placing two orders into the market before the open, one to buy and one to sell. The buy is
placed above the sell so when one is filled, the other is left in place to become the stop
loss.
A short profit target is chosen, and the trade is exited with any profits at the end of the day
(regardless of size), or the trade is carried over to the next trading session if it is in

drawdown but not stopped out.
The mechanics of this trade are simple. Assuming you have followed the market over the
course of several days or weeks, you notice the market appears to be exhibiting a volatility
contraction on a day before an important report or announcement is expected. When both
the volatility contraction and the appearance of an event of significance are present, you
are ready to place your day-trade order for the beginning of trading the following morning.
The orders Two day orders are placed simultaneously for the opening of the following
day's trading:
1) Buy the market several ticks above the previous close.
2) Sell the market several ticks below the previous close.
The nearest support or resistance level is used as a basis for the closest order.
The two orders should be placed strategically to allow entry only if the market moves
through one of them. At the same time, the order should not be placed any further than you
are willing to risk on a single trade (never more than 16 ticks in bonds). This is the critical
step but becomes easy when the trading range is contracted enough to allow a low-risk
entry with the buy order above the previous day's high and the sell order below the
previous day's low.
Let the market enter you into a position. Don't try to double guess or pick direction. If you
aren't filled, the orders are canceled at the end of the day.
You exit under any of these conditions:
1) If the market moves more than 16 ticks with you at any time, take profits.
2) If you get stopped out.
3) If the market appears to be ending the day with any profits, exit on the close.
Tale of the tape Some examples over the last few months illustrate where this trade has
worked or not worked and the risk or reward associated with the trades on an after-
the-fact basis. These are real trades that were executed.
Feb. 7, 1997
Two orders were placed the evening of Thursday, Feb. 6, prior to the next morning's U.S.
employment report release:
1) Buy March T-bonds at 112-06.

2) Sell March T-bonds at 111-19.
This trade risked 19 ticks ($594) and had a good potential to return between $500 and
$2,000 by day's end.
The relief of inflationary pressure from the employment numbers released Feb. 7 and the
drop in oil prices took the lid off the bond market for the near term. The only saving grace
was a declining Nikkei, which encouraged the Japanese to continue their strong U.S. bond
sales.
The employment report at 7:30 a.m. (CST) Feb. 7 got me long
with a buy stop in March T-bonds at 112-06 as the market
skyrocketed up to 113-00 (see "Employment perks," left). When
it hit 112-30, I got out with a 24-tick instant profit of $750. The
stop at 111-19 never came close to being triggered, and if
anyone got stuck waiting until the close, the trade still pocketed 10 points or $312 profit.
Nov. 1, 1996
After a sharp move up earlier in the week, the market
consolidated as I expected (see "Election results," right), and
Friday, Nov. 1, looked like a great day to put on a bracket
day-trade: There was a Federal Reserve announcement, and the
Presidential election was looming heavily on the markets. Two
orders were placed for the Nov. 1 open.
1) Buy December T-bonds at 113-05.
2) Sell December T-bonds at 112-26.
If one was filled, the other became the stop. The difference between them was only 11
ticks ($344). One of my rules is I'll take profits if I'm up six ticks at any point after my fill
or if I have any profit at the end of the day.
This day-trade in December T-bonds worked like a charm. I was filled long on the open at
113-10 and exited at 113-18 for a quick eight-tick gain ($250 minus commissions per
contract). After that, I stayed out and let the market go nuts without me.
Aug. 23, 1996
This trade was interesting because there was a lag time of one day between the volatility

contraction on Aug. 21 and event day (an employment report) on Aug. 23 (see "Short and
quick,"). Two orders were placed for Friday's opening, using the Aug. 21 range as a guide:
1) Buy December T-bonds at 110-11.
2) Sell December T-bonds at 109-28.
The difference between them is only 15 ticks ($468), which is the size of the stop.
I was filled short 10 minutes after the open at 109-26 and exited at 109-10 for a quick
16-tick gain. The profit was $500 per contract minus commissions.
Summary of results Over five months, I made 14 of these trades; 11 were profitable and
only three were losers. Of the three that lost, the amount lost was roughly equal to the gain
on any one winner, so the ratio of winners to losers becomes the most important statistic in
this case. For this reason, the effect of the commissions and slippage were incidental to the
result of this trading technique.
As with any technique or system, this bracketing day-trading concept will work when the
conditions are right for the entry or exit points you are seeing. But over time, I've come to
realize one key aspect to my success is "if the odds of success don't weigh in my favor,
stand aside."
In other words, the key to successful day-trading is not developing entry points; it is
knowing when not to trade. Having mixed technical and fundamental indicators may be
enough reason to persuade me to stand aside. On the other hand, a small range day right
before the release of an important report is enough reason for me to climb aboard.
Mitchell Holland is a full-time trader, futures educator and author of the recent book, The
Master Trader. He resides in San Diego. E-mail:
Back to contents page
Copyright © 2000 Futures Magazine Inc.
Taking advantage of the big event
[5/14/2001 2:46:15 am]
back
Employment perks
[5/14/2001 2:46:17 am]
back

Election results/Short and quick
[5/14/2001 2:46:19 am]

Get ready: How an
options specialist
prepares for the market
opening
At 6:45 a.m. the traffic already is building on the expressways that
feed into downtown Chicago.
From inside your car, the only real difference between winter and
summer at this time of day is that in summer the sun is already up.
In the dead of winter, traders only see the sunshine on vacation.
When we drive to work, it's dark; when we're through for the day, it's dark again. But just
like the screaming and shoving down in the pits, you get used to it.
I've been trading upstairs and in the pits of Chicago for the last 15 years. Getting up early
never bothered me as much as how cold it gets in January ungodly cold. But I suppose
that's just one more thing that separates the players from the pretenders in this high-stakes
game we play.
While I came to Chicago to play football for the Chicago Bears, all I really have to show
for that is four pre-season games and a few great friendships. I took my agent's advice and
traded a career as a backup football player for a job on the floor of the Chicago Board
Options Exchange (CBOE) probably the best trade of my career.
While the trading floor immediately was intensely exciting, options trading didn't come
easy. My college studies prepared me for a job in advertising or design, not sophisticated
financial instruments like options and futures. However, hard work and mentors such as
Tom Haugh, general securities principal at PTI Securities & Futures, helped me see the
light at the end of the tunnel.
Although I've traded everything from equity and index options to futures and warrants, I've
never stopped learning. If you ever think your education is complete, somebody else who's
hungrier will figure out a better way and take your edge away.

Morning prep When I get into our offices at 7 a.m., our clerks already have been at work
for about an hour. As we trade tens of thousands of options and 1-2 million shares of stock
every trading day, it's extremely important to check our options and stock confirmations
vs. what our computers say we've traded the pervious day. Mistakes in clearing of either
stock or options could cost us thousands of dollars fast, so this trade-checking session is
essential for us to start each day with the correct position.
Our main trading room the so-called war room is an octagon shaped room with 30
running feet of trading desk on the west wall and a 12-foot-by-12-foot conference table in
the middle.
The room gets more boisterous and energized with each tick of the clock. Our head of
research will hand me the critical overnight news stories that will affect our trading that
day. By 7 a.m. he will have run several search programs on a host of computers that
incorporate fuzzy and Boolean logic to hunt for key words in news stories that he feels will
influence the markets.
The computers assemble and search through news feeds from more than 20 news services
such as Dow Jones, Bloomberg and Reuters. These feeds cost us more than $5,000 per
month; such is the value of information. However, it's only slightly less important to get
that information to our traders as fast as possible. That's why the computers are networked
throughout our offices and down to our traders on the floor.
My $1 rule If a story is compelling enough, my next step is to find the average trading
range for the stock. If the range between the high and the low is less than $1, I usually take
a pass. There simply isn't enough edge for me to jump in and trade when the average daily
range of the stock is so small.
Just like most traders, when I have to buy, I pay the offer; when I have to sell, I hit the bid.
Therefore, if the stock trades an eighth wide between the bid and the offer, I give away a
quarter point to trade in and out. With an average daily range of less than $1, an
extraordinary percentage of my trades would have to be right to make any money. Hence,
my $1 rule.
Liquidity My next step is to check the average daily volume the stock trades. I can't step
in and buy 1,000 shares of some off-the-wall stock without knowing how much trades each

day. In some of these stocks, 1,000 shares could represent nearly 20% of the average daily
volume. So knowing there usually is enough volume to get in and out without impacting
price helps me avoid the dogs.
Timeliness I view the news that is out before the opening in a different way than the news
that comes out during the trading day because all option models are forced to make some
assumptions as they seek to tell us the correct value of a call or put.
One obvious mistaken assumption is that there is continuous pricing of a given stock or
future. Only foreign currencies come close to living up to that presumption. Stocks and
most futures have specific trading hours and are closed for several hours of each 24-hour
day and over weekends. Therefore, the likelihood of news causing a rapid ascent or
descent of a stock or futures contract is greatest before the opening.
CNBC and CNNfn are likely to have many of the 20 different news sources we have, but
clearly the more expensive sources have fewer eyes watching for market-moving
information and are, thus, all the more valuable. If a story we deem a market-mover comes
out on the Dow Jones news wire, for instance, the world will know about it within minutes.
If a similar story comes out from some other vendor, however, that information might not
be widely disseminated for several hours.
Obviously, the search for market-moving news continues from the beginning of our day
straight through until the last trader locks the door. To make sure we stay on top of the
stories, we have audio, visual and printed alerts that flash, beep and print throughout the
day.
Strategy planning Armed with the news of the day, our traders take turns sitting around
our conference table going over our stock and option positions and plotting strategies for
the day. We begin with our Chicago Designated Primary Market Maker (DPM) group, go
through the rest of our specialist books and finish with our independent floor traders. The
DPM unit carries our largest positions in about 30 option classes and, consequently,
requires the greatest amount of time to complete the daily review and tactics planning.
Just as it is important for us to know the average daily range of the stock, we have to know
the range of volatility for a given security or future. For instance, if a stock such as Micron
(MU) has traded in a range in volatility from 45% to 80%, we would be aggressive buyers

of call and put options on the lower end of that scale and an aggressive seller of both if the
volatility were on the high end of the range.
As we go over the MU positions, for example, we discuss the overnight news that will
affect MU. If our position is long gamma (that is, one in which we own option premiums
vs. short gamma in which we are net short option premium), and the overnight news is
positive, we would plan which calls and puts to price attractively to draw buyers into the
market. Conversely, if we were short gamma with the same news overnight, we would bid
calls and puts such that we would attract option sellers into the markets.
If there were known news events occurring during the day or after the close (such as new
product announcements or earnings), we would keep the options bid higher until the news
broke and then sell as aggressively as possible.
By knowing the dates of the news events (government releases, stock dividends, earnings
reports, etc.), we can plan to carry long gamma into those situations. If, however, someone
is willing to bet that the news will be either so good or so bad that it will move the
stock outside the expected range, we will sell them options and take the risk of going into
the news event short gamma. If we've done our homework, the odds will be solidly on our
side.
We follow the same procedure for each position each trader has. Between traders in
Chicago, Philadelphia and New York, we go through a little more than 100 such positions
every morning. By 8:15 a.m. everyone is heading to the trading floor, and I'm sitting in
front of the 20 monitors, watching S&P's, T-bonds and CNBC.
Just 15 minutes to showtime.
Jon Najarian is president of Chicago-based Mercury Trading Co., an options specialist.
He has traded on the CBOE since 1981, both on and off the floor. Web page:
www.DrJsPlanet.com.
Back to contents page
Copyright © 2000 Futures Magazine Inc.
Get ready: How an options specialist prepares for the market opening
[5/14/2001 2:46:20 am]
Day-trader's paradise

Most traders have their favorite markets. In many cases, though,
the same markets you excel in with interday trading, you may
perish in with intraday trading. It's vital, then, to know how to pick
good markets for your day-trading strategies.
But one market can't be a panacea for all day-trading problems. It's
still important to know what you trade, warns William Darby,
president and chief executive officer of Darby Trading Consultants
in White Plains, N.Y. "Professional traders often find they have a
special knack for some markets, whether it's from past job
experience, training, whatever. Some people just perform better in
certain markets."
Still, if a market doesn't have a wide price range as well as considerable volatility, liquidity
and consistency Darby says, it can be a bust for day-trading no matter how well you know
it.
Range of opportunity Barring options, it's hard to make money trading a flat market. This
stands for any type of trader short term, long term, etc. but it's particularly true for
day-traders. By definition, day-traders liquidate any open positions at the close; they don't
have the luxury of waiting to see if tomorrow brings the expected price move. (They also
avoid any adverse overnight moves.) So if a market doesn't exhibit a healthy range of daily
prices, forget about day-trading it.
"One of the necessities in day-trading is having markets that move enough. If there's no
range, then the prospects for day-trading are just terrible," says Ralph Greenberg, president
of Exel Inc., a system designer in New York.
Market menu
It's even better to trade markets with wide ranges within a
longer-trending market, he says. Trading when ranges widen,
particularly in the direction of an intraday trend, can improve a
day-trader's chances. Greenberg likens this to a surfer catching a much better wave if the
wave is going with the tide rather than against it.
How large the daily range must be depends on your profit objectives. One guide is using

the average daily costs of trading as an absolute minimum. But many markets are tradable
using this bottom-line criterion. So you should look for the market that has the largest price
range; it should be the best candidate for day-trading.
To compare the typical daily price ranges of markets, you need to standardize their ranges.
To do this, find each market's average point range and multiply that by the dollar value of
each point.
For example, from Jan. 1, 1997, to Feb. 28, 1997, June S&P 500 futures had an average
daily range of 1,098 basis points. At $5 per point, that's an average daily dollar range of
$5,490. (See "Brief glance," below, for a particularly strong move in the S&P 500.) The
S&P 500 obviously has a considerable amount of profit potential or loss potential, as
Greenberg points out for the day-trader.
Brief glance
Near the other end of the profit scale are Eurodollar
futures. From Jan. 1, 1997, to Feb. 28, 1997, the June
contract had a daily range of six basis points. With each
one-point move worth $25, the average daily dollar range
of Eurodollars is $150.
But average daily range merely represents the maximum profit potential of an average day
making two trades buying at the top, selling at the bottom, not always a realistic
scenario. But there's more to consider, which can improve a market's prospects, than just
average daily range.
Specifically, there's the simple fact traders can make more than two trades a day. Knowing
that, it's obvious volatility, as well as daily range, is an important consideration for
day-traders.
Widening the window If a market is volatile, it may be a good candidate for day-trading
even if its daily range is lacking.
Consider a market with a daily price range of only $500: If it hits each barrier six times,
that's still more profit potential than a market with double the price range that only makes a
straight shot from bottom to top (or vice versa).
Buying soybeans at $7 per bu. and selling at $7.09 1/2 earns you a net profit of $475. But

selling corn at $2.54 3/4, buying at $2.50, buying again at $2.50 1/4, selling at $2.55, going
short one more time at $2.54 and finishing the day getting out at $2.49 1/4 earns you a net
profit of $712.50.
But when volatility increases, so does slippage, which means lost opportunity. Darby
points to the coffee market in early March 1997: "You would see 50 to 100 points between
ticks. That's $375. You're looking at about $700 just to get in and out of a position."
Volatility also is difficult to predict: "Some markets will just go dead," Darby says.
Troy Pugh, a broker with Allendale, adds that also means typically dead markets can
suddenly come alive: "Government reports and various seasons can cause an otherwise flat
market to move considerably," such as spring for grains and during cattle-on-feed reports
for live cattle.
Another strike against volatility is that to take advantage of it, you must make more trades.
And that means paying more commissions, Greenberg says. "Commissions are a very large
part of the day-trading equation. You don't want to nickel and dime yourself to death," he
says.
But despite the risks of slippage and commissions, market professionals agree volatility
definitely is a plus for the day-trader.
As Dave Eberhart, analyst with the market research firm Optima Investment Research in
Chicago, points out: "Typically, the more volatile, the better. There's more opportunity
where there's volatility."
Perfect market?
Take my trade please Liquidity is the most difficult
variable to measure, traders and analysts say. Volume and
open interest are quantifiable aspects of a market that
measure its activity and level of participation, but other
aspects, such as activity of the locals and the intraday
amount of commercial participation, are hard to put a
finger on, particularly for the upstairs trader.
Some traders contend certain markets, such as energies, precious metals and some softs,
are dominated by groups of floor traders who make it difficult for upstairs traders to get

decent fills intraday. Floor traders, of course, don't have a vendetta against off-floor
traders, they simply are looking out for their own interests. Other attributes of such
markets, (for example, low open interest and choppy volume) compound the problem of
getting good fills.
"A thinly traded market can be put out of whack by big locals on the floor [or] by large
commercial orders coming in," Eberhart says.
Pugh says day-trading only the markets and contract months with the highest open interest
is vital "to get the best liquidity." Volume, of course, also is important. When volume is
steadily rising and is high relative to its average, it indicates a market may be ripe for
day-trading. But also be aware of markets where volume spikes suddenly. Tomorrow may
not be as liquid because such spikes often are do to some short-term fundamental factor,
Pugh says.
Another factor that often overrides most measures of liquidity is your broker. The point of
liquidity is to get good fills, and your broker often has more to do with this than the
market.
"Your trading system doesn't have a whole lot of value if you can't get your order down to
the floor fast enough," Eberhart says.
Greenberg says short of trial and error in picking the most efficient broker, the day-trader
can be sure he calls his order directly to the floor instead of to an order desk.
"Most houses take the order at an order desk," Greenberg says. "First you have to wait for
them to answer the phone, then take your account number, then repeat the order back to
you, then send the order down to the floor, which prints out and must be ran to the ring
[pit]."
No surprises Day-traders can expect most markets that are good day-trading prospects
over time to continue to be good prospects into the future. Using the past to predict a
market's future intraday profit potential works great, Darby says, unless yesterday's
potential was the result of a market shock.
"News events can cause nice, wide ranges," Darby says. "But you can't necessarily expect
those same ranges the following day."
In the absence of news events and market shocks, though, daily price range, volume, open

interest and price movement generally are stable.
Eberhart, who works a great deal measuring and assessing volatility, points out: "If you
have a market where volatility is trending higher, chances are the next day will be more
volatile as well."
So once you've found a day-tradable market, you can expect the track to be stable,
Eberhart says. It's up to each trader to figure out which way prices will run.
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Copyright © 2000 Futures Magazine Inc.
Day-trader's paradise
[5/14/2001 2:46:24 am]